Abstract
The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Summary of WP/92/49
Alternative Forms of Mineral Taxation, Market Failure, and the Environment” by Timothy R. Muzondo
In recent years, a number of authors have examined the effects of mineral taxation on resource allocation, revenue yield and stability, conservation, and depletion dates. These studies have, however, assumed that mineral extraction involves no external effects (or environmental externalities) on other economic agents. As a result, they have not examined the nature of appropriate corrective taxes that may be required to ensure that mining firms take into account the social costs that they impose on others. Nor have they investigated the environmental effects that may be caused by various forms of taxes.
A notable exception is the paper by Schulze (1974), which explicitly incorporates the effects of cumulative environmental externalities in the firm’s decisions and derives an appropriate corrective tax. Equally important, but not considered in the paper, are environmental externalities that depend on the current rate of mineral extraction. In addition, the paper does not examine the environmental effects of various taxes noted above within a framework that incorporates the cumulative environmental externalities that he develops.
This paper explores the environmental effects of various mineral taxes in a framework that assumes that extraction of minerals involves environmental externalities that depend on rates as well as cumulative amounts of extraction. It proposes an appropriate corrective tax for an extractive firm that generates such externalities. The results of the paper indicate that neutral taxes, such as the resource rent tax, need to be combined with appropriate corrective taxes, such as the one proposed in this paper, to ensure efficient resource allocation. In the absence of such corrective taxes, neutral taxes may perform worse (especially from an environmental point of view) than nonneutral taxes, such as specific taxes, because the latter partially offset the impact of environmental externalities on resource allocation. Finally, the paper finds that while changes in nondistortionary taxes have no impact on amounts of environmental externalities, changes in distortionary taxes do.